Division A of Kennesaw, Inc. has $800,000 in assets and manufactures part #589. On January 1...

 

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Division A of Kennesaw, Inc. has $800,000 in assets and manufactures part #589. On January 1 of the current year Division A's manager invested $1,000,000 in automated equipment for part #589 assembly. At that time, Division A's expected income statement was as follows: Sales revenue Operating costs: Required: Unit level (variable) Facility level (fixed, all cash) Depreciation New equipment Other Division operating profit $3,200,000 400,000 1,500,000 300,000 250,000 $750,000 On November 16, a sales representative from Rome, Inc. approached Division A's manager. For $1,300,000, Rome offers a new assembly machine with significant improvement over the equipment bought on January 1. The new equipment would expand division output by 10 percent while reducing cash fixed cost by 5 percent. The new equipment would be depreciated for accounting purposes over a three-year period. Depreciation would be net of the new machine salvage value of $100,000. The new equipment meets company's 20 percent cost of capital criterion. If the new machine is purchased, it must be installed prior to the end of the year. For practical purposes, though, depreciation on the new machine can be ignored because it will not go into operation until the start of the next year. The old machine, which has no salvage value, must be disposed to make room for the new machine. The company has a performance evaluation and bonus plan based on ROL. The returns includes any loses of disposals of equipment. Investment is computed based on the average balance of assets for the year, net book value. a. What is division's ROI this year if it does not acquire the new machine? b. What is division's ROI this year if it does acquire the new machine? c. If the new machine is acquired and operates according to specifications, what ROI is expected to be next year? d. Is it ethical to decline to purchase the new machine? Explain. Division A of Kennesaw, Inc. has $800,000 in assets and manufactures part #589. On January 1 of the current year Division A's manager invested $1,000,000 in automated equipment for part #589 assembly. At that time, Division A's expected income statement was as follows: Sales revenue Operating costs: Required: Unit level (variable) Facility level (fixed, all cash) Depreciation New equipment Other Division operating profit $3,200,000 400,000 1,500,000 300,000 250,000 $750,000 On November 16, a sales representative from Rome, Inc. approached Division A's manager. For $1,300,000, Rome offers a new assembly machine with significant improvement over the equipment bought on January 1. The new equipment would expand division output by 10 percent while reducing cash fixed cost by 5 percent. The new equipment would be depreciated for accounting purposes over a three-year period. Depreciation would be net of the new machine salvage value of $100,000. The new equipment meets company's 20 percent cost of capital criterion. If the new machine is purchased, it must be installed prior to the end of the year. For practical purposes, though, depreciation on the new machine can be ignored because it will not go into operation until the start of the next year. The old machine, which has no salvage value, must be disposed to make room for the new machine. The company has a performance evaluation and bonus plan based on ROL. The returns includes any loses of disposals of equipment. Investment is computed based on the average balance of assets for the year, net book value. a. What is division's ROI this year if it does not acquire the new machine? b. What is division's ROI this year if it does acquire the new machine? c. If the new machine is acquired and operates according to specifications, what ROI is expected to be next year? d. Is it ethical to decline to purchase the new machine? Explain.